Soaring energy costs have sunk these global sectors

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Supply chain disruption and soaring energy costs have combined to form a perfect storm of inflation. 

"The biggest risk on global growth and asset prices across developed and emerging markets is the outlook on energy prices," says Amit Goel, Lead-Portfolio Manager of both the Fidelity Global Emerging Markets Fund and the India Fund. 

"The world is paying the highest energy prices as a percentage of GDP."

Supply disruption, meanwhile, aren't abating - as China continues to lock down major manufacturing centres in response to COVID. 

These headwinds aren't evenly spread across markets, though. 

In this wire, Goel discusses how these pressures are flowing down to auto manufacturing, industrials, transportation and even retail.  

He also touches on the knock-on affects from the Russia-Ukraine war and how Fidelity factors in ESG considerations in light of it.   


Edited transcript

Livewire: How have supply chain disruptions changed the game for emerging market investments?

Amit Goel: We have seen supply chain disruptions throughout the last two or three years. They started with COVID when a large part of Asian supply chains was affected because of the COVID lockdowns. Then you see, I think imbalanced demand across the world. There was a lot of stimulus in the Western world in COVID, which resulted in a very strong actually consumer demand in parts of the US, in parts of Europe. 

I think the supply chains in Asia were still affected by COVID. And that continued to result in big supply disruptions. And now with China getting back into COVID, it is further accentuating that. I think what we have seen over the last 12, 24 months in some parts is that supply disruption continues. 

I think I'm talking about apparel, chemicals, and even semiconductor chips. 

In autos, VC supply chain reception on auto equipment, components, as well as semiconductor chips at the margin when demand is now slowing down and some supply chains are getting fixed, I think we are seeing some resolution of these supply chain issues.

The most affected sectors have been sectors like auto, where component supply chains were affected, but chip supply was affected as well because chip demand suddenly went up as the world went digital due to COVID. Similarly, we saw big supply chain disruptions in areas like chemicals, because a large part of that is produced in China and used around the world and used for industries like pharmaceuticals, basic chemicals are affected a lot, and prices of basic chemicals are up. 

We continue to see supply disruption in commodities, which has seen commodities moving up as well. I think some of these supply disruptions are continuing. If you ask me, autos are still feeling supply disruption in terms of chips. We own a large car rental company and they haven't been able to buy cars last year. They were buying almost 200,000 cars and the number of cars they bought last year came down by 30%. We expect that to be resolved in the next 12 to 24 months. 

Similarly, I look at a few chemical companies in India. They were all impacted by huge import price increases from China for basic chemicals. I own a sportswear company, which supplies apparel and shoes to Nike around the world. They were hugely impacted by COVID lockdowns in their major facilities in China and Vietnam. I think we are on a path to resolution. 

You have already seen US consumption moderating at a point. You have seen China's consumption now moderating because of COVID and then fixation on these supply chain issues. So I would say we have passed the kind of big hump of supply chain disruption.

They're still continuing across some sectors and we should expect resolution with a combination of both demand softening as well as fixation of these supply chains. 

LW: What is the outlook for global energy prices?

Amit Goel: The biggest risk to global growth, global asset prices, especially equities across developed markets, as well as emerging markets is the outlook on energy prices. Obviously, energy prices were already high with supply being tight last year, we've seen oil going to a hundred dollars. We have seen spot LNG going to $20, coal going to $400 and all of that got accentuated by this Russia/Ukraine issue, given Russia is such an important part of the global energy trade. They export more than five million barrels per day of oil. This supply is getting affected, we have seen a continuous increase in oil and gas prices, across all the spectrums that we see.

That combined with the fact that the world is now coming out of COVID, we have higher transportation demand, especially travel. Aviation travel transportation is 50% of oil usage globally. Half of the oil gets used in passenger, commercial, and aviation fuel, and we continue to see demand being very elastic at a time and supplies being constrained. 

I think what we expect going forward is that I think energy prices have reached a level where we should expect some impact on demand in the next six to nine months. The world is now paying the highest energy prices as a percentage of its GDP. So we are almost at 9-10% energy cost as a percentage of global GDP, which is the highest in history and almost equal to the 1970s oil shock. 

So we should expect some demand softening at these prices. Obviously, it is very inelastic. Oil and energy is a very basic commodities that everyone uses in their daily life.

The governments are subsidising it in large parts of the world, which is not leading to consumer demand being down. But we will see some impact on demand at these prices and the structural slow down or moderation in energy prices has to come from the supply. 

That means that we need to find a solution to the Russia/Ukraine situation, as well as increasing supplies from OPEC, from Saudi, from Iran and from other sources. So I think it's a combination of, again, demand softening, supply improving, and energy prices, but that's one risk that we have to monitor for asset classes going forward, because it has big implication for inflation, as well as interest rates.

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